Grinding It Out

by Ray Kroc

  In our business there are two kinds of attitudes toward advertising and public relations. One is the outlook of the begrudger who treats every cent paid for ad programs or publicity campaigns as if they were strictly expenditures. My own viewpoint is that of the promoter; I never hesitate to spend money in this area, because I can see it coming back to me with interest. Of course, it comes back in different forms, and that may be the reason a begrudger can’t appreciate it. He has a narrow vision that allows him to see income only in terms of cash in his register. Income for me can appear in other ways; one of the nicest of them is a satisfied smile on the face of a customer. That’s worth a lot, because it means that he’s coming back, and he’ll probably bring a friend. A child who loves our TV commercials and brings her grandparents to a McDonald’s gives us two more customers. This is a direct benefit generated by advertising dollars. But the begrudger has a hard time appreciating this—he wants to have his cake and eat it too.

  Harry Sonneborn was not a begrudger. He was always willing to spend money to make money. But he liked things neat and theoretically functional; so he was mad as hell at me back in 1957 when I hired a small public relations firm on a retainer of $500 a month. The outlay was an insult in Harry’s mind, considering the financial sacrifices he and June were making; the fact that I couldn’t tell him exactly what the outfit was going to do for us really threw him into a regular fit. He was justified. But, on the other hand, so was I. That firm, Cooper and Golin, now Golin Communications, is still with us today, and they deserve a lot of the credit for making McDonald’s a household word.

  There is another characteristic of the begrudger that I have seen appear from time to time. It is a negative outlook that’s easy to see in attitudes toward competition. The begrudger regards competition with envy. He wants to learn their secrets and, if possible, undermine them. He’ll often go out of his way to give the competition a bad name.

  Fortunately, we don’t have too many begrudgers in the McDonald’s organization. Their style doesn’t suit ours, and they don’t stay around long. But I have had people with us who seriously proposed that we plant spies in the operations of our competition. Can you imagine? Next thing we’d learn that Ronald McDonald is a double agent! My response to that kind of claptrap has always been that you can learn all you ever need to know about the competition’s operation by looking in his garbage cans. I am not above that, let me assure you, and more than once at two o’clock in the morning I have sorted through a competitor’s garbage to see how many boxes of meat he’d used the day before, how many packages of buns, and so forth.

  My way of fighting the competition is the positive approach. Stress your own strengths, emphasize quality, service, cleanliness, and value, and the competition will wear itself out trying to keep up. I’ve seen it happen many times. Joe Post, whose Springfield, Missouri, McDonald’s I mentioned earlier, is a fierce competitor. His success has bred any number of fast-food imitators in the area (it’s worth noting in passing how our competition rides on the coattails of our real estate research by locating near our stores, oftentimes right next door). Joe has knocked them out, one after another, not by copying them or by planting spies in their operations, but simply by giving the public the old McDonald’s QSC and V.

  Competition has from time to time planted spies in our stores. One very prominent franchisor once got hold of a McDonald’s operations manual. Word was that he intended to use it to expand his drive-ins to include hamburgers and french fries. My attitude was that competition can try to steal my plans and copy my style. But they can’t read my mind; so I’ll leave them a mile and a half behind.

  A good example of this was the situation we faced with our 200th unit, which was opened August 30, 1960, in Knoxville, Tennessee, by a former marine corps major named Litton Cochran. There was a competing hamburger operation a few doors away, part of a large Southern chain, and the day Litton opened his McDonald’s his competitor announced a special—five hamburgers for thirty cents. They kept it up for a solid month. Litton wasn’t selling any hamburgers, but he was showing a profit because many of the folks who got hamburgers “to go” from the competition were coming to his place for soft drinks and french fries. Litton figured he’d hang in there, the competition couldn’t afford to keep it up for long, and his business would pick up as soon as the guy next door backed down. Instead, the competition got tougher. It advertised a new special—10, 10, and 10—hamburger, milk shake, and french fries for ten cents each!

  Litton was really staggered by that one. He was president of the Knoxville Marketing and Sales Executives’ Club, and some of his associates there were outraged by his competitor’s tactics. One of them, a lawyer, told Litton that it was a clear violation of federal trade regulations since this one store in a chain was being used to drive him out of business by cutting prices. The lawyer offered to go to the government and initiate action against the competitor.

  It was with this sad story that Litton Cochran appeared in my Chicago office wondering what he should do.

  I am sure this big ex-leatherneck may have heard more abrasive language in the course of his marine career, but I think he’ll admit that he’s never had a more sincere chewing out than I gave him that afternoon.

  “Litton, you are getting your ears beat down, and it’s not right,” I said. “We can agree on that. But I’m going to tell you something I feel very strongly about. The thing that has made this country great is our free enterprise system. If we have to resort to this—bringing in the government—to beat our competition, then we deserve to go broke. If we can’t do it by offering a better fifteen-cent hamburger, by being better merchandisers, by providing faster service and a cleaner place, then I would rather be broke tomorrow and out of this business and start all over again in something else.”

  I could see that my words had made a positive impression. Litton told me later that he could hardly wait to get back to Tennessee and get cracking in his store. I never heard another word from him about problems with competition, which is pretty good considering that he now owns ten McDonald’s in Knoxville! He’s president of the national alumni association of the University of Tennessee, where he often lectures on marketing, and I’m told he gives a dynamite talk on the virtues of our free enterprise system.

  10

  Art Trygg was the bosom companion of my late fifties. He had been on the staff of Rolling Green Country Club, where I often ate dinner in those days. I hired him to write a newsletter for our operators, but he soon became my valet and chauffeur as well. We were like boyhood chums. And I needed Art’s gruff good humor and sympathetic ear at dinner, because a powerfully distracting new force had swept into my life—I was in love!

  Her name was Joni Smith. She lived in St. Paul.

  I had gone to the Criterion restaurant up there to meet the owner, Jim Zien, who was interested in becoming a McDonald’s franchisee. I found myself having a hard time concentrating on our dinner conversation, however, because of the classy organ music in the background. It set my pianist’s spirit twitching and dancing in time to its sprightly rhythms. Finally Jim took me over to introduce me to the organist.

  Well!

  I was stunned by her blond beauty. Yes, she was married. Since I was married, too, the spark that ignited when our eyes met had to be ignored, but I would never forget it.

  I saw her often in the months that followed. Jim Zien’s involvement in McDonald’s provided an ideal excuse for me to go up there. We progressed from exchanging small talk, to playing duets on piano and organ, to long, earnest conversations in which I poured out my ideas about McDonald’s and my plans for the company’s future. Joni was a marvelous listener.

  Jim Zien finally got his first location going in Minneapolis and, as luck would have it, he hired Joni’s husband, Rollie, to be his manager. This led to long telephone consultations between Joni and me. Strictly business, of course, but with an overlay of growing affection. I would be tingling with pleasure from head to toe when
I hung up the receiver.

  Feeling this way made it impossible for me to go on living with Ethel. I moved out of our home in Arlington Heights to an apartment in the Whitehall. The next step was to propose to Joni that we both get divorced and marry. I knew this would be a difficult question for her to face, because both of us had grown up with a deep respect for religion and propriety, and we both had been brought up to believe in the sanctity of marriage. She couldn’t make up her mind. Finally, I decided that one of us would have to make the first move and get a divorce, and it would have to be me.

  So I bought my freedom from Ethel. She wound up getting everything I had except my McDonald’s stock. She got the house, the car, all the insurance, and $30,000 a year for life. I was happy to pay the alimony. I respected Ethel, she was a lovely person and a wonderful homemaker, and I wanted to be sure she was secure. My immediate problem was raising the attorneys’ fees, $25,000 for my lawyer and $40,000 for hers. There was only one way I could get my hands on that kind of money—by selling Prince Castle Sales, the company that had been my birthright as an independent businessman. Harry Sonneborn helped me arrange a transaction in which executives of McDonald’s would purchase Prince Castle for $150,000 cash. It was worth far more, but I didn’t mind, I had to have the money immediately and my own people would be the beneficiaries of the deal (they subsequently sold the company for about a million dollars).

  Now I could marry Joni as soon as she got her divorce. That thought filled me with glad anticipation. I knew she would need persuasion, but I was certain that she would do it. Nothing so right as our being man and wife could possibly go wrong. So I went up to make my case and watch her face as she considered it. There was nothing in her reaction that dismayed me. In fact, it was more positive than I’d hoped for. Of course, she needed time to think it over. I’d been prepared for that, and I plunged into the press of McDonald’s business to relieve the anxiety of waiting.

  * * *

  The most important item in my plans for the company was to end our relationship with the McDonald brothers. This was partly for personal reasons; Mac and Dick were beginning to get on my nerves with their business game playing. For example, I had introduced them to my good friend and paper supplier, Lou Perlman, and they began buying all of their paper products from him, too. They would come to Chicago and visit Lou and ask him to drive them around to see all the McDonald’s locations in the area, which he did, but they would not come by corporate headquarters or even call me on the telephone; Lou would fill me in later on where they’d gone and what they’d said.

  But the main reason I wanted to be done with the McDonalds was that their refusal to alter any terms of the agreement was a drag on our development. They blamed their attorney for this lack of cooperation, and he and I certainly were at dagger’s point all the time; but whatever the reason, I wanted to be free of their hold on me.

  I knew from conversations I’d had with Lou Perlman and others that the McDonald boys could be persuaded to sell. Maurice’s health had not been the best, and Dick had expressed concern about that and talked about retiring. I wanted to help them retire, but I was afraid of what it might cost me. Harry Sonneborn and I had several long sessions hashing over the pros and cons of it, deciding the best approach to take. Finally, we determined that we would hit them right between the eyes with it. No use shilly-shallying, because their lawyer would only waste a lot of time bickering about it, and we would come out at the same place in the end anyhow.

  So I called Dick McDonald and asked him to name their price. After a day or two he did, and I dropped the phone, my teeth, and everything else. He asked me what the noise was, and I told him that was me jumping out of the 20th floor of the LaSalle-Wacker Building. They were asking $2.7 million!

  “We’d like to have a million dollars apiece after taxes, Ray,” Dick explained. “That’s for all the rights, the name, the San Bernardino store, and everything. You know, we feel we’ve earned it. We’ve been in business over thirty years, working seven days a week, week in and week out.”

  Very touching. But somehow I just couldn’t seem to work up any tears of pity.

  This was really going to take some financial wheeling and dealing. I asked Harry to take a run at the three insurance companies that had lent us the million and a half dollars. We had to anyhow, because they had a right of first refusal on McDonald’s borrowing for a period. But John Gosnell said Paul Revere Life couldn’t take any bigger bite than it had, Fred Fideli said State Mutual Life felt the same, and Massachusetts Protective couldn’t swing a deal without the other two. So there we were—three strikes and we were out on the street looking for some Santa Claus with a bagful of money.

  I was feeling pretty low, so I called Joni and told her about it. I said it would be a lot easier for me if I had her by my side. She said she needed more time. She couldn’t make up her mind.

  Damn!

  Harry found our money man in New York. His name was John Bristol, and he was financial advisor to Princeton University, Howard University, Carnegie Tech, the Ford Foundation and others, a total of twelve educational and charitable institutions. The deal we agreed on, I think, put a new wrinkle in American financial arrangements. Harry was delighted with its intricate design. Here’s how it worked:

  In return for $2.7 million in cash from Bristol’s group (who were called The Twelve Apostles in our records) we were to pay them .5 percent of the gross sales of all McDonald’s stores in three periods. In the first period we would pay .4 percent immediately and put aside .1 percent until the third period. The method of computing how much of the .4 percent would go to interest was figured on the basis of 6 percent of $2.7 million; whatever remained would go toward retiring the principal. The first period would end when the principal was retired. The second period would be for a length of time equal to the first period, whatever that was. In the second period we would pay a straight .5 percent of our gross. The third period, then, would be the payment of the deferred .1 percent from the first period.

  Our original projection sheets anticipated that it would take us until 1991 to pay it all off. But that was on the basis of 1961 volume. We managed to pay off the principal in six years and finished paying off the loan completely in 1972.

  It was an extremely successful deal. All concerned were happy. The Twelve Apostles wound up making about $12 million on it, and while that seems like a terrific price to pay, remember that we had been forking over .5 percent to the McDonald brothers all along anyhow. The total cost of the transaction to us—about $14 million—was peanuts compared to what the corporation earned in the years that followed by retaining that .5 percent instead of paying it to Mac and Dick McDonald. On today’s systemwide sales of more than $3 billion, that .5 percent would be up there over $15 million a year.

  The McDonald brothers retired happily to travel and tend their real estate investments in Palm Springs. Maurice died a few years later and Dick moved back to New Hampshire and married his childhood sweetheart, a pleasant person named Dorothy French, daughter of a Manchester banker. Her first husband had died and Dick and his first wife were divorced, so the reunion was fortunate. I’m told that the marriage has mellowed Dick’s New England crustiness to the point where he now recalls our association as “the finest business relationship we ever had.”

  I was happy too, except for one part of the deal that stuck in my throat like a fishbone. That was the McDonald brothers’ last minute insistence on retaining their original restaurant in San Bernardino. They were going to have their employees run it for them. What a goddam rotten trick! I needed the income from that store. There wasn’t a better location in the entire state. I screamed like hell about it. But no way. They decided they wanted to keep it, and they were willing to pull the plug on the whole arrangement if they didn’t get it. Eventually I opened a McDonald’s across the street from that store, which they had renamed The Big M, and it ran them out of business. But that episode is why I can’t feel charitable or forgiving towar
d the McDonald brothers. They went back on their promise, made on a handshake, and forced me into grinding it out, grunting and sweating like a galley slave for every inch of progress in California.

  California! I was fascinated by the promise I saw out there. The tide of population growth and economic and cultural energy in the country had shifted from the Northeast and was running toward the South and Southwest. I didn’t want McDonald’s to miss out on that rising crest.

  “You know, I’ve been thinking I ought to go out to California and open an office out there.…” I remarked to Art Trygg.

  “I knew another guy had ideas like that,” my companion said with mock peevishness as he wheeled my Thunderbird through Michigan Avenue traffic. “The doctor told him to soak his head in beer every night, and it cured him.”

  “Don’t you like sunshine, Art?”

  “Not if I can get moonshine, Ray.”

  I have a whole album of mental snapshots from that period. Turning through them brings back a rush of memories. Not nostalgia, but reaffirmation of my faith in McDonald’s and the people who helped me build it. I speak of faith in McDonald’s as if it were a religion. And, without meaning any offense to the Holy Trinity, the Koran, or the Torah, that’s exactly the way I think of it. I’ve often said that I believe in God, family, and McDonald’s—and in the office, that order is reversed. If you are running a hundred-yard dash, you aren’t thinking about God while you’re running. Not if you hope to win. Your mind is on the race. My race is McDonald’s.

  Mental Snapshot: A thin, solemn young man sits next to my desk. He’s clearly nervous. His name is Luigi Salvaneschi and he has not been in this country long. June Martino sponsored his immigration from Italy and got him a job as a crewman in our store in Glen Ellyn, Illinois. I am trying to find out what potential he might have within the corporation. His chief handicap is not his difficulty with the English language—he probably has a bigger vocabulary than I do. His problem is that he is overeducated.